Class action act didn’t alter removal rule

A familiar story in troubled economic times has produced a new ruling concerning federal civil procedure from the Sixth Circuit.

A Kentucky couple bought a house with a loan issued by America’ Wholesale Lender, secured by a mortgage with Mortgage Electronic Registration Systems (MERS). Later, the couple defaulted on the mortgage. Countrywide Home Loans foreclosed in state court, claiming MERS assigned the mortgage.

The couple filed a counterclaim against Countrywide, arguing that MERS never had a valid mortgage. Countrywide said the counterclaim was deficient because MERS wasn’t joined as a necessary party.

The couple then filed a third-party class action complaint against MERS. MERS, said the couple, was nothing more than an electronic data base for keeping track of mortgages and did not hold a valid mortgage, having failed to follow Kentucky’s registration procedures.

Here’s where the fresh twist to things begins.

MERS, as a third-party defendant, removed the case to federal district court. Normally, third-party defendants can’t do that. First Nat’l Bank of Pulaski v. Curry, 301 F.3d 456, 461 (6th Cir. 2002).

The Kentucky couple, citing Pulaski and 28 U.S.C. § 1441(a), moved to remand their case to state court.

This time it’s different, MERS argued.

[MERS] sought removal of the action based on 28 U.S.C. § 1453(b). The [Class Action Fairness Act of 2005] provides that a district court has jurisdiction in a civil action where there is diversity of citizenship; the amount in controversy exceeds $5 million; and the proposed class includes at least one hundred members. …

[MERS argued] that under section 1453(b), a qualifying class action “may be removed by any defendant without the consent of all defendants.”

You’re reading the statute way too broadly, the Sixth Circuit ruled.

[MERS] attempts to distinguish Pulaski by arguing that section 1453(b), which includes the term “any defendant,” has expanded the right of removal in Class Action Fairness Act cases.

But that language is used in a specific context — it is part of a larger clause providing that an appropriate action “may be removed by any defendant without the consent of all defendants.” Contrary to [MERS’] position, the provision simply modifies the rule that all defendants must consent to the removal.

What the Class Action Fairness Act doesn’t do is extend removal opportunities to third-party defendants, the Sixth Circuit concluded.

The case is In re Mortgage Electronic Registration Systems.

COA: $1.1M home must go

The Michigan Court of Appeals has ordered the complete or partial destruction of a $1.1 million home in Macomb County because the owners built it too close to their property lines.

The home owners, Simon and Saca Palushaj have been locked in an eight-year dispute with Gerald and Aileen Thom. The Thoms are the next-door neighbors who are insisting that deed restrictions in Washington Township’s Lakewood Hills Subdivision be enforced.

The restrictions at issue require homes to be 100 feet apart and at least 40 feet from the side lot line. The Palushaj’s home is 80 feet from the Thom’s and 28 feet from the side lot line.

When the Palushajs began construction, the Thoms expressed concerns about deed restriction violations. They were concerned enough that, in 2004, they tried to enjoin construction. The trial court refused to grant an injunction, opining that the deed restrictions were either unenforceable or inapplicable. The court apparently questioned the Thoms’ motives, offering “unclean hands” as another reason to deny them relief.

But the court also cautioned the Palushajs to proceed at their own risk. Proceed they did, building a 9,000 square foot home, complete with specialized construction to aid one of their children who has cerebral palsy.

The Thoms proceeded as well, taking an appeal to the COA. In 2007, the appeals court ruled that the restrictions were enforceable. The panel handed Judge James Biernat of the Macomb County Circuit Court the unenviable task of fashioning a remedy.

On remand, the Thoms pressed for demolition of the home, or at least enough of it to eliminate the deed restriction violation.

Biernat said there were some equities to balance. After holding a hearing, he visited the parties’ homes. Biernat apparently wasn’t impressed with the Thoms’ claims that they were being “crowded in” by the Palushajs’ home. The Palushajs, on the other hand, would be economically crippled if ordered to raze the home.

Biernat ordered the Palushajs to pay the Thoms $183,000 in costs and attorney fees, and to maintain landscaping that limits the view between the two properties.

The Thoms went back to the COA and argued Biernat lacked the discretion to balance the equities and to order a remedy that didn’t actually enforce the deed restrictions.

The COA agreed. The appeals panel noted that when the case was remanded to Biernat:

[T]he burden [was] on the trial court “for a determination of the appropriate remedy.” Accordingly, the trial court must fashion a remedy consistent with this opinion and consistent with the controlling opinion of [Webb v Smith (Aft Sec Rem), 224 Mich App 203; 568 NW2d 378 (1997)]. Thoms v Palushaj, unpublished opinion per curiam of the Court of Appeals, issued August 23, 2007 (Docket No. 286074)[.]

In Webb, a case almost factually identical to the Thom-Palushaj dispute, the COA “noted that the amount of damages the defendants would incur if an injunction was issued was wholly immaterial to the process of determining a remedy.” The Webb court correctly upheld the trial court’s decision to refrain from balancing the equities.

So, the Thoms’ remedy is exactly what they asked for, ruled the COA. Along with the ruling, there was an undercurrent of “can’t we all just get along?”

[W]e vacate the trial court’s order and remand with instructions to enter an order requiring defendants to bring their home into compliance with the applicable deed restrictions. …

While it appears from the record that plaintiffs are unlikely to reach a compromise with defendants that will allow defendants to maintain their home as it currently exists, we note that such a compromise would perhaps best serve the interests of each of the parties.

The case is Thom, et al. v. Palushaj, et al.

Realtors hope $25B foreclosure settlement will spark housing revival

The following post was written by John Stodder, The Dolan Company National Affairs Correspondent. Dolan is the parent company of Michigan Lawyers Weekly.

With the residential real estate industry shell-shocked from years of a moribund market, its spokespeople can be forgiven for taking a cautious attitude toward this week’s announcement of a $25 billion settlement with five of the nation’s biggest mortgage lenders over flawed and fraudulent foreclosure practices.

The money in the settlement will mostly go to borrowers and homeowners who are underwater. According to the Washington Post, the settlement “will force lenders to revamp how they interact with troubled homeowners and bar them from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications.”

But could the settlement help get the residential market moving again, even in the face of historic low interest rates and plummeting prices?

“We do hope that the resolution will help more lenders with the certainty they need to kick loose more loans,” said Walter Molony, a spokesman for the National Association of Realtors inWashington,D.C. He cautioned, however, that the impact will be limited because the settlement doesn’t help the millions of borrowers with loans owned by Fannie Mae or Freddie Mac.

Eric Berman, communications director for the Massachusetts Association of Realtors, was pleased that the settlement was designed to help more homeowners stay in their homes because that kind of stability slows the ongoing descent of home values in many markets – though the market isn’t as bad, he hastened to add, inMassachusetts as it is in many other areas.

But even there, he said, “Distress sales impact values of homes of people who are not in a distress situation.”

Realtors also hope the settlement “can give lenders the confidence to start up with loan modifications, short sales and principal write-downs,” Berman said. “We’re going to have to wait and see. From our members’ point of view, short sales take forever. The only thing short about a short sale is the definition.”

While realtors continue to ruminate, the blogosphere reacted quickly:

 

• Financial blogger Yves Smith at Naked Capitalism gives “The Top Twelve Reasons Why You Should Hate the Mortgage Settlement.”  She is scathing. “We’ve now set a price for forgeries and fabricating documents: It’s $2,000 per loan,” which, as she points out, for an average loan is “less than the price of the title insurance that banks failed to get when they transferred the loans to the trust.”
• Writing at the Huffington Post, financial reform activist Dennis Kelleher calls the deal a “criminal sell-out,” because the $20 billion in loan forgiveness, though impressive at first blush, only adds up to $20,000 per 1 million homes. According to a Zillow report in November, some 14.6 million home borrowers have fallen into a negative equity position.
• Reuters’ financial blogger Felix Salmon likes the deal because the attorneys general didn’t give up too much and the banks didn’t get too much. Banks only got immunity from suits over the practice of robosigning, but can still be sued over a range of other alleged misdeeds that contributed to the mortgage default crisis.

 

– John Stodder

 

Two counties sue MERS for transfer taxes

The Lansing State Journal reports this morning that Ingham and Branch counties have sued Mortgage Electronic Registration Systems Inc., and a number of banks and mortgage companies, for unpaid transfer taxes on properties MERS purchased at foreclosure sales and later transferred to financial institutions.

According to Ingham County Register of Deeds Curtis Hertel Jr., although MERS buys the properties, when it later transfers ownership, it claims a transfer tax exemption for tranactions valued less than $100. Hetel believes that the county and state are owed “millions of dollars” in unpaid transfer taxes over the past decade.

From the LSJ:

Just what, exactly, MERS owns and the rights that ownership gives it have become contested questions as the foreclosure crisis has continued.

The company may claim to hold title to tens of millions of U.S. mortgages, but it invests no money in those loans and holds no interest in the debt underlying them.

For that reason, Michigan’s Court of Appeals ruled earlier this year that the company could not foreclose by advertisement, that is, could not foreclose without taking the case before a judge.

“There are some really profound contradictions built into the DNA of the MERS system,” said Christopher Peterson, a professor at the University of Utah’s S.J. Quinney College of Law, who has written on MERS.

“When the financial institutions try to use MERS as a tool to foreclose on your house, they will commonly represent that MERS has an ownership stake that justifies allowing them to do that,” he said, “but when they talk to the county register of deeds offices about whether or not they have to pay fees or taxes, they claim not to have the ownership interest.”

The LSJ reports that counties in six other states have filed similar suits.

House Judiciary Committee mulls mortgage fraud bills

Tomorrow, the Michigan House Judiciary Committee will consider legislation that cracks down on individuals and institutions engaged in residential mortgage fraud.

The committee meets Sept. 8 to consider a bipartisan, 16-bill package for referral to the Committee on Banking and Financial Services.

Sponsors of the legislation are not fooling around.

For example, under HB 4487, lenders face a 15-year felony for fraud during the lending process or when filing mortgage documents afterward, or for failing to disburse funds as promised in a loan commitment.

HB 4488 stiffens penalties for using false pretenses in connection with real estate transactions — the bigger the fraud (as measured by the transaction’s value), the longer the prison term.

Other bills in the package deal with fraud by notaries public and amending sentencing guidelines related to mortgage-fraud crimes.

Listed below are the bills, links to the text and other information, the primary sponsors, and thumbnail descriptions of the legislation.

• HB 4462 – Rep. Marty Knollenberg (R-Troy) – Crimes; forgery; forging or uttering and publishing a real estate document; prohibit, and provide for penalties and remedies.
• HB 4478 – Rep. Lisa Lyons (R-Alto) – Criminal procedure; sentencing guidelines; sentencing guidelines for forgery and uttering and publishing of real estate instruments; enact.
• HB 4487 – Rep. David Nathan (D-Detroit) Financial institutions; generally; residential mortgage fraud; prohibit.
• HB 4488 – Rep. Brandon Dillon (D-Grand Rapids) – Crimes; fraud; value thresholds for crime of false pretenses; revise.
• HB 4489 – Rep. George Darany (D-Dearborn) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of false pretenses; revise to reflect increased penalties.
• HB 4490 – Rep. Mark Meadows (D-East Lansing) – Criminal procedure; statute of limitations; certain crimes relating to real property; revise statute of limitations.
• HB 4491 – Rep. Rashida Tlaib (D-Detroit) – Occupations; notaries public; penalties for notary public violations; clarify, and increase.
• HB 4492 – Rep. Rashida Tlaib (D-Detroit) – Criminal procedure; sentencing guidelines; sentencing guidelines for notary public violations; enact.
• HB 4495 – Rep. John Walsh (R-Livonia) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of mortgage fraud; enact.
• SB 43 – Sen. Tupac Hunter (D-Detroit) – Financial institutions; generally; crime of residential mortgage fraud; establish.
• SB 44 – Sen. Tupac Hunter (D-Detroit) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of mortgage fraud; enact.
• SB 249 – Sen. Darwin Booher (R-Evart) – Crimes; fraud; value thresholds for crime of false pretenses; revise.
• SB 250 – Sen. Darwin Booher (R-Evart) – Criminal procedure; sentencing guidelines; sentencing guidelines for crime of false pretenses; revise to reflect increased penalties.
• SB 251 – Sen. Mike Nofs (R-Battle Creek) – Criminal procedure; statute of limitations; certain crimes relating to real property; revise statute of limitations.
• SB 252 – Sen. James Marleau (R-Lake Orion) – Occupations; notaries public; penalties for notary public violations; increase.
• SB 253 – Sen. John Gleason (D-Flushing) – Criminal procedure; sentencing guidelines; sentencing guidelines for notary public violations; enact.

HB 4651: Judges would review most foreclosures

Hot on the heels of yesterday’s State Court Administrative Office recommendation to cut 49 trial and appellate judgeships comes news of legislation that would require judicial review of most foreclosures on residential properties.

The Lansing State Journal reports that HB 4651

introduced in May by [Rep. Jim] Ananich, a Flint Democrat, and seven other Democratic state representatives, would require a judge to review all foreclosures on owner-occupied residential properties.

Ananich and Ingham County Register of Deeds Curtis Hertel Jr. are touting the legislation. Said Hertel, as quoted by The LSJ:

We need something to make sure banks play by the rules in these foreclosures and also put in an incentive to give people reasonable modifications.

He acknowledged that the bill, if enacted, would bring additional pressure to the court system.

In their opinions

“Democracies need political debate more than they do topless bars in order to function.”

– Sixth Circuit Judge Raymond Kethledge, explaining in Big Dipper Entertainment v. City of Warren, that its fairly tough to uphold content-based restrictions on speech, but zoning regulations that limit the secondary effects of adult businesses — and thus limit the speech “conveyed by a topless bar” — will usually pass muster.

In a 2-1 decision, Kethledge, joined by Judge Alan Norris, rejected a topless bar operator’s claim that he had been unconstitutionally denied a permit to open a club inside the city of Warren’s Downtown Development Authority.

Kethledge said the city carried its burden to show that the zoning ordinance was designed to limit the secondary effects of adult businesses. The city did so by referring to 49 reports and studies on the matter.

The topless bar operator said that the city’s exclusionary zoning left too few other sites available for adult entertainment. But Kethledge noted that supply far outstripped demand: there were 27 conforming sites available and only one other topless bar application filed in the last five years.

In his dissent, Judge R. Guy Cole said the ordinance, because it imposed a prior restraint on speech, is presumed to be unconstitutional. And, he said, it was in fact unconstitutional because it did not provide for prompt judicial review after a permit denial.

In their opinions

Instead of carving out an exception to this exclusion, this theory of interpretation would create a virtual, if not complete, exclusion of the exclusion.

6th U.S. Circuit Court of Appeals Judge Jeffrey S. Sutton’s response in TMW Enterprises, Inc. v. Federal Insurance Co. to an insurance claimant’s argument that coverage was due for water damage, which was not an excluded peril, caused by faulty workmanship, for which coverage was excluded.

TMW bought a condominium building. As later discovered by TMW’s renovators, it needed some work, $3.9 million worth, to fix structural problems caused when the original builder “improperly constructed exterior walls, leaving them vulnerable to water infiltration.”

No problem, said TMW as it filed an insurance claim against its $10 million policy with Federal.

Problem, Federal replied. The policy excludes damages for faulty workmanship.

No problem, said TMW. It wasn’t the workmanship that caused the damage, it was the water that came into the building due to the faulty workmanship. And, we notice, water damage is not an excluded peril, so please pay up.

Problem, said Sutton.

As an “all-risk” policy, this insurance policy basically covers everything unless specifically excluded. That means the number of possibilities for last-in-time “but for” causes of damage are limited only by the imagination of the reader.

What if a roof contains a flawed design (think Frank Lloyd Wright, see Essex Ins. Co. v. Fidelity & Guar. Ins. Underwriters, Inc., 282 F. App’x 406, 409 (6th Cir. 2008)), and it leaks water into the house, which ruins one of the floors? But for the water, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “water.” Coverage?

What if faulty construction allows humid summer air to enter the building, which rusts metal fixtures? But for the exposure to the summer air, no damage to the fixtures would have occurred. Yet the contract does not exclude damages caused by “air.” Coverage?

What if a poorly constructed ceiling beam falls, smashing the floor below? But for the force of gravity, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “gravity.” Coverage?

As in each of these examples, so too here: The very risk raised by the flawed construction of a building came to pass.

To say that the risk was not covered because other elements or natural forces were the last causative agents of the damage, though to be sure utterly foreseeable causes of the damages, is to eliminate the exclusion.
It is exceedingly strange to “think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage.” Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939, 941 (5th Cir. 1965) (Friendly, J., sitting by designation).

But all is not lost for TMW, said Sutton.

As the district court viewed the dispute, the identification of the faulty workmanship exclusion, together with undisputed factual evidence that there was a “but for” causal relationship between the damages and this exclusion, meant that summary judgment for Federal was in order.

In view of the reality that the “ensuing loss” clause, under either way of looking at it, does not permit Federal to deny coverage for losses not proximately caused by faulty workmanship, and in view of the fact that TMW did not appear to have an opportunity to seek coverage for such losses, we think TMW should be given an opportunity to do so on remand.

In their opinions

“[T]he majority’s unrestrained decision today is a huge mistake.”

Michigan Supreme Court Justice Elizabeth A. Weaver, dissenting in Tkachik v. Mandeville.

It’s not too often that you’ll find MSC Justices Stephen J. Markman, Michael F. Cavanagh, Maura D. Corrigan and Chief Justice Marilyn Kelly in agreement about much of anything.

But the four of them formed a majority and ruled that when Frank Mandeville’s wife, Janet, died, he unquestionably received fee simple title to property they held as tenants by the entirety.

No surprise there. But they also ruled that Frank owed Janet’s estate some cash because, well, because he was a cad.

In the last 10 years of their marriage, Frank frequently took long trips to foreign countries. He was gone on one such trip for the 18 months before she died. While Frank was abroad, Janet had to pay the mortgage, insurance and taxes on their property by herself.

He never called or wrote, even though he knew she was battling breast cancer. He didn’t even return for her funeral.

Before she died, she did everything she could, short of divorcing Frank, to cut him out of her life. She wrote him out of her will. She transferred her retirement benefits to keep them from him. She even tried to defeat the right of survivorship in the marital properties through a quitclaim deed.

A few months after Janet’s death, Frank strolled into probate court and petitioned to set aside Janet’s will. Susan Tkachik, Janet’s sister and personal representative, had little trouble convincing the court that Frank had “willfully abandoned” Janet, and, under MCL 700.2801(2) was not a “surviving spouse.”

Then Susan went on the offensive. She filed her own probate complaint, arguing that because Frank was not a surviving spouse, he and Janet had owned the marital property as tenants in common, and that he shouldn’t get fee simple title.

But MCL 700.2801(2), said the probate court, has limited application and certainly doesn’t destroy a tenancy by the entireties. Frank gets the property in fee simple.

Susan wasn’t through. She amended her complaint to seek contribution from Frank for all the mortgage, insurance and taxes payments Janet made before her death.

The probate court didn’t go for that one, either. Nor, after a couple of trips up and down the appellate ladder, did the Court of Appeals.

Writing for the majority, Markman, said that’s just not fair. Susan sought equitable relief, and that’s what she’s going to get.

Our consideration of the “special circumstances” of this case leads us to conclude that the following facts are legally sufficient to permit a claim for contribution between tenants by the entirety:

(a) where the decedent spouse has taken sole responsibility for the property maintenance payments while the other spouse had absolutely no personal contact with her for at least the last 18 months of her life;

(b) where the other spouse did not attempt once to communicate with the decedent spouse during this time, even though he acknowledged that he was aware that she was battling cancer;

(c) where the other spouse was disinherited in the decedent spouse’s will;

(d) where the decedent spouse sought diligently, albeit unsuccessfully, to divest the other spouse of his interest in the real properties before she died; and

(e) where the other spouse was deemed a non-surviving spouse under MCL 700.2801(2)(e)(i).

These unusual facts cry out for equitable relief so that “complete justice” can be done and give us assurance that in granting plaintiff’s remedy we are exercising our discretion carefully and responsibly.

Justices Robert P. Young Jr., Weaver and Diane M. Hathaway dissented. Said Young:

There is an old legal adage that “bad facts make bad law.” This phrase has rarely been as true as on the circumstances giving rise to this case. …

With its decision today, the majority now permits posthumous collateral attacks on the validity of marriages in this state where neither spouse has taken the appropriate legal steps to challenge the marriage or the financial equities of the marriage during life.

In doing so, the majority ignores the perfectly adequate legal remedies that our Legislature created in specific contemplation of marital disharmony — specifically, an action for separate maintenance — instead preferring to craft a new remedy recognized nowhere else in the country.

This rule allowing contribution between tenants by the entireties outside the context of a divorce or separate maintenance action is not supported by a single case or authority from any jurisdiction, let alone authority from Michigan.

As such, the new rule the majority creates today is untested and holds unforeseen consequences that reach much further than the narrow and unassuming decision the majority believes it has issued in this case.

Weaver, in her dissent, quoted Young’s statement with approval and labeled the majority’s approach a “huge mistake.”

Attorney says Saginaw County can’t make road commission spare trees

Woodman, spare that tree!
Touch not a single bough!
In youth it sheltered me,
And I’ll protect it now.
‘Twas my forefather’s hand
That placed it near his cot:
There, woodman, let it stand,
Thy axe shall harm it not!
– George Pope Morris, 1830

The Saginaw News reports that Andre Borrello, an attorney for Saginaw County, has opined that county leaders have no authority to tell the Saginaw County Road Commission what trees it cuts down.

The agency is in a legal scuffle with Swan Creek Township resident Patricia T. Flora, who has filed an injunction against the Road Commission to prevent it from chopping down 44 trees in front of her house on Van Wormer, including eight century-old maples.

The commission wants the trees removed for a drainage and road project. Circuit Judge Janet M. Boes will decide whether to extend the restraining order Oct. 23.